3 top companies that don’t make a profit, and why they don’t

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In years gone by, ploughing billions into companies that don’t make a profit seemed certifiably insane — but now the old rules don’t apply.

More frequently, huge valuations are being placed on companies (either by public markets or by private equity firms) that are essentially a bet against future profits rather than investment in a good balance sheet.

While there have certainly been cases in the past where companies have been unprofitable for a fair while only then to become behemoths (such as Tupperware), it seems it is becoming more common that the market is willing to overlook the fundamentals in exchange for potential.

It’s likely hoping that by becoming the dominant player in music and podcast streaming that it’s able to use its scale to drive better deals (but that is totally speculative on our part).

So, what did we learn?

Some of the biggest companies in the world don’t make a profit — whether that’s okay is up to the individual investor, but it seemingly hasn’t harmed their valuations.

It’s also interesting to note that two are software companies, while one operates very much as a software company.

In the case of Uber and Spotify, a lot of the costs in their businesses can be put down to the fact that they’re chasing scale — and truly global scale costs money.

In Tesla’s case, starting a manufacturing operation and establishing a supply chain from scratch to match the likes of General Motors is going to cost a lot of money — but in the case of all three, R&D spending is seen as absolutely vital.

Spotify and Uber are in the tech game, which means they have to constantly evolve and upgrade their core tech offerings to remain relevant to the user — or find themselves the victim of disruption.

In the case of Tesla, it can find itself outspent by capitalised competitors quickly if it stops moving. If it puts out disruptive tech, larger companies can just copy the tech and get it to market quicker.

So its competitive advantage is to be at the forefront of innovation.

In all three cases, not making a profit hasn’t held them back…yet. Because they’ve been able to demonstrate that they need to burn through cash to fulfil their promise, their investors have given them leniency.

But these are giant companies with billion dollar valuations — there are examples of companies which don’t make a profit but are still investable companies right here in Australia.

Searching for rocks (and profit)

Australian investors are probably some of the most sophisticated investors when it comes to resources investing.

And small cap investors in this space will be familiar with companies that don’t make a profit. Mining exploration companies are a prime example.

From exploration to pre-feasibility studies to bankable feasibility studies, these companies spend millions in expenses on the promise that one day they’ll be able to sell a resource — or be snapped up by a bigger player.

As with the new breed of tech stocks, profitability has little to do with where shareholders find value.

They find value either in speculative investing or in the longer-term vision of the company that will hopefully result in a shared appreciation.

It all begs the question: is profitability the key marker of a ‘good’ company for investors?

Not anymore, it seems.

This content does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

Star Investing is a content and marketing platform dedicated to emerging ASX-listed companies. Star Investing has commercial partnerships with some of companies featured in its content. This content is disclosed and marked as Sponsored Content. None of the content on Star Investing is intended to constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.